David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital. It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Reno De Medici S.p.A. (BIT:RM) does carry debt. But the real question is whether this debt is making the company risky.
What Risk Does Debt Bring?
Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.
See our latest analysis for Reno De Medici
What Is Reno De Medici's Net Debt?
You can click the graphic below for the historical numbers, but it shows that as of June 2019 Reno De Medici had €86.5m of debt, an increase on €60.4m, over one year. However, because it has a cash reserve of €30.0m, its net debt is less, at about €56.6m.
How Healthy Is Reno De Medici's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Reno De Medici had liabilities of €199.6m due within 12 months and liabilities of €120.9m due beyond that. On the other hand, it had cash of €30.0m and €105.3m worth of receivables due within a year. So its liabilities total €185.3m more than the combination of its cash and short-term receivables.
This deficit is considerable relative to its market capitalization of €265.7m, so it does suggest shareholders should keep an eye on Reno De Medici's use of debt. This suggests shareholders would heavily diluted if the company needed to shore up its balance sheet in a hurry.
We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.
Reno De Medici's net debt is only 0.91 times its EBITDA. And its EBIT easily covers its interest expense, being 23.2 times the size. So you could argue it is no more threatened by its debt than an elephant is by a mouse. Reno De Medici's EBIT was pretty flat over the last year, but that shouldn't be an issue given the it doesn't have a lot of debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Reno De Medici can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.